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TaxTalk’s basic guide to avoiding inheritance tax (IHT)

By RJP LLP on 16 August, 2011

To kick of our special IHT surgeries taking place in September, this blog covers all the basics you should know about inheritance tax and how you can avoid it.  One of the big myths surrounding this tax is that it is just something the very rich have to worry about!

In its basic form Inheritance tax is levied at 40% on everything you own (your estate) upon death after allowing for any outstanding debts and your nil rate band (£325,000 in 2011/12).

When calculating the value of your estate, all the assets you own are taken into account - property, jewellery, paintings, cars as well as savings and investments such as shares or insurance policies. An estate would also include any jointly owned assets, for instance, which may be held in a trust.

 

IHT is not just a tax for the rich

There is a misconception that IHT only affects the really wealthy but in reality, because local house prices are now so high and generally, levels of wealth have been rising from generation to generation, most ‘ordinary’ people should be thinking about whether inheritance tax might affect them.

As outlined above the basic threshold at which IHT would have an impact is £325,000, or, for married couples and registered civil partners, £650,000 - provided that on the first death everything in the estate is left to the surviving spouse or partner.  Note this rule only applies if your spouse or partner has lived in the UK for 17 of the last 20 years and so is classed as UK domiciled for IHT purposes.  If not, the exemption is limited to £55,000.

 

5 ways to avoid paying IHT

It can be possible to avoid paying IHT even if your estate is over the initial £325,000 threshold or £650,000 spousal threshold, in ways which include the following 5 examples:

1. Gifts made to a qualifying charity are exempt from IHT.  In addition, for those with high value estates, if you make a gift of 10% or more of your total net estate, the IHT rate of tax of 40% will be reduced to 36%.

2. Gifts classed as ‘exempt transfers’.  If you give away your assets and survive for seven years after making the gift you usually don’t have to pay IHT on the value of those gifts.  However this only applies in full if you cease to benefit from the asset. So for example if you give away your home but continue living in it, you could be exempt from IHT provided you pay market rate rent to the beneficiaries, who would in turn have to pay tax on this income.

3. Annual exemption gifts.  You can give away up to £3,000 worth of gifts each year.  It is also possible to include unused allocations from the previous year to increase the amounts.  Official ‘small gift’ exemptions of up to £250 can also be given away to as many people as you wish, inheritance tax free.

4. Wedding or civil partnership gifts.  A range of allowances exist for people wishing to give money to a couple getting married.  The gift must be made either on the day of the ceremony or shortly before to qualify.  The scale allowable is as follows:

-       Parents can each give cash or gifts worth £5,000

-       Grandparents and great grandparents can each give cash or gifts worth £2,500

-       Anyone else can give cash or gifts worth £1,000.

5. Business, woodland, heritage and farm relief.  If you own a business, farm, woodland or a national heritage property, some relief from inheritance tax may be available.  The IHT relief available ranges from 50% to 100% and is available for shares in a trading business, a partnership interest in a firm or a farm.

Generally, IHT must be paid before the executors of a deceased’s estate can apply for the grant of probate and usually within 7 months of death.  For this reason, IHT planning is important because a situation may arise whereby assets must be sold off quickly by the beneficiaries of the estate, possibly at less than market value, simply to cover the tax bill.

IHT surgeries for specialist advice

If you are concerned about inheritance tax and considering what your best options are to minimise what experts call a ‘voluntary tax’ it is worth seeking specialist advice.  RJP will be running IHT surgeries during September at which you will be able to get detailed advice about the most tax efficient options for your own circumstances for a fixed fee.

When: Surgery dates are 20th and 28th September

Where: Thames Ditton office

To find out more contact Lesley Stalker by emailing las@rjp.co.uk.

 

 

 

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There are many benefits to asking your accountant to handle probate

Did you know RJP LLP are licensed by the ICAEW to offer a full probate service.

This can save you time and money, plus we can advise on matters related to inheritance tax at the same time.